Reserve Bank of Australia Raises Interest Rates to a 10-year High

Reserve Bank of Australia Raises Interest Rates to a 10-year High

In an attempt to bring down stubbornly-high inflation, the Reserve Bank of Australia (RBA) increased interest rates by a quarter-percentage point and suggested further tightening will be necessary. This led to the currency rising and bond yields increasing significantly.

It Is the Highest Interest Rates Increase Since 2012

At its first gathering of the year, the Reserve Bank of Australia made a widely anticipated decision to raise interest rates to 3.35%, the highest level since September 2012. In his statement outlining hopes for more rate increases, Governor Philip Lowe removed last year’s caveat that there was no set course on rates.

Tim Baker, head of macro research at Deutsche Bank AG, noted: “The Reserve Bank of Australia has eliminated the preconditions for more hikes in their forward guidance. Therefore, they are done with the pause narrative.” This hawkish speculation caused a spike in the currency to 69.51 US cents, followed by a slight pullback, while three-year bond yields rose 18 basis points and stocks decreased 0.5%.

Australia Acted Later Than Its Neighbors

Australia has been slower to react to higher prices than its international partners, with an interest rate increase of only 3.25 percentage points as compared to 4 in New Zealand and 4.5 in the US. As part of his plan for a smooth landing, Governor Lowe aimed for this more tepid approach when it comes to raising rates–a sharp shift from December’s discussion surrounding possible pauses on tightening, which led traders to reconsider their rate outlooks accordingly.

Reserve Bank of Australia Raises Interest Rates to a 10-year High

Su-Lin Ong, RBC Capital Markets Chief Economist, proclaimed that this statement had a clear “hawkish tinge.” She emphasized the Board’s intention to return inflation to target any potential worries regarding the moderating activity.

Even With Signs Of Recovery, Inflation Is Still Very High

Even though monetary policy often lags behind, Lowe is still confident in expecting a progressive decrease in household spending. Fortunately for him, the housing market has started to level off, providing hope for an organized correction. Moreover, employment growth has weakened lately, and consumer spending appears to be decelerating – all factors which work in his favor. 

Inflation is still considerably high, with core prices in the fourth quarter spiking at 6.9%, much larger than anticipated by the Reserve Bank of Australia (6.5%) and climbing more sharply than observed in America or Britain. This helps display why Deutsche and Goldman Sachs Group Inc. economists forecasted that this year’s cash rate might surpass 4%.

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